Investing in Regenerative Agriculture and Food
Investing in Regenerative Agriculture and Food podcast features the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems while making an appropriate and fair return. Hosted by Koen van Seijen.
Investing in Regenerative Agriculture and Food
352 Matt Schmitt - How to make regenerative food and agriculture bankable
A conversation with Matt Schmitt, founder of Structure Climate, about how to get institutional investors invest in the regenerative food and agriculture transitions. These are big terms we use regularly, but what do they actually mean and, more importantly, how do we get there? How do we get novel climate technologies- like biochar machinery, chestnut agroforestry systems, biofertilizer plants, or weeding robots- bankable? Novel technologies often start as luxury goods with a clear customer demand, even if they don’t yet have many existing transactions, just very clear customer interest.
How do we make these technologies investable, or at least recognisable, by major financial institutions (like the big, "boring" banks, insurance companies, and pension funds). We need billions and trillions to flow to the soil. So, how do we get these asset managers over time to start financing this seriously, in the same way they do solar projects or sustainable real estate?
How does a capital stack for a novel technology look like, and how do we financially engineer it with creativity—the good kind, not the kind that caused financial crises in the past decades? To roll these technologies out across farms and landscapes, we need scalable solutions. While commodification in food and agriculture has a bad reputation, turning enabling technologies into bankable commodities can be a good thing. It helps farmers adopt systems that hold more complexity and resilience on their land.
More about this episode on https://investinginregenerativeagriculture.com/matt-schmitt.
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In Investing in Regenerative Agriculture and Food podcast show we talk to the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems while making an appropriate and fair return. Hosted by Koen van Seijen.
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Bankable, project finance investable? How do we get institutional investors invested in regenerative food and agriculture transitions? These are big terms we use regularly, but what do they actually mean and, more importantly, how do we get there? How do we get novel climate technologies bankable and I'm using technologies in a very broad sense. It could be biochar machinery, but also chestnut agroforestry systems, biofertilizer plants, weeding robots, etc. Novel technologies that maybe start as a luxury good, but with a clear customer demand, and that doesn't mean many existing transactions, just a very clear customer interest. How do we make these things investable or, let's start with, recognizable by big financial institutions yes, the quote-unquote big boring banks, insurance companies and pension funds. We need billions and trillions to flow to soil. So how do we get these large asset managers, over time, to start financing this with serious money, like they do currently with any other solar projects or sustainable real estate? How does the capital stack look like and how do we financially engineer it with creativity I mean the good one, not the creativity that got us into a few crises over the past decades To get these technologies rolled out across many, many farms and landscapes. We often talk bad about commodification in food and agriculture, but when it comes to technologies that enable farmers to hold more complexity on their land. Turning these technologies into bankable commodities is a good thing.
Speaker 1:This is the Investing in Regenerative Agriculture and Food podcast Investing as if the planet mattered, where we talk to the pioneers in the regenerative food and agriculture space to learn more on how to put our money to work to regenerate soil, people, local communities and ecosystems, while making an appropriate and fair return.
Speaker 1:Why my focus on soil and regeneration? Because so many of the pressing issues we face today have their roots in how we treat our land and our sea, grow our food, what we eat, wear and consume, and it's time that we, as investors big and small and consumers, start paying much more attention to the dirt slash soil underneath our feet. To make it easy for fans to support our work, we launched our membership community and so many of you have joined us as a member. Thank you. If our work created value for you and if you have the means and only if you have the means consider joining us. Find out more on gumroadcom slash investing in regen ag. That is, gumroadcom slash investing in regen ag or find the link below welcome to another episode today with the founder of Structure Climate, who provides project financing services to climate companies with a focus on emerging technologies, with clear customer demands and demonstrable climate benefits, basically making new climate infrastructure and solutions bankable. Welcome Matt.
Speaker 2:Thanks Con Great to be here.
Speaker 1:Now I wanted to put the bankable in the intro as well. We talked about it a lot in a sort of theoretical if it only was bankable, if only the banks would come in and do X, y, z, and today we're actually going to unpack that. What does this actually mean, and how we get there step by step. None of this is easy, but it's definitely possible. But I want to start with a personal question we always love to ask is how come you are in this space and in this space it's a bit larger than the region space, obviously but in the climate financing space, let's say, or climate solutions financing space how come you spend quite a bit of your waking hours thinking about bankability, which is probably not something you would put on a t-shirt?
Speaker 2:Yeah, actually that's a great idea for some merch, so I might have to look into that. So I've worked in a lot of different sectors. I was in the army a lifetime ago. I was in energy tech. I was at Cargill for a number of years. That's where we first met, of course, and what I found pretty consistently shout out actually matt used to support a podcast, I think on your company credit card. So we used to be supported by cargo for a significant like amount.
Speaker 1:It was 100 bucks a month for people but I think insignificant to cargo, although now I think there's a huge like profit drop in all kinds of drama happening but anyway I'm very thankful for your support while you were there.
Speaker 2:Oh, that's great, that's wonderful, that's wonderful, and just all throughout. The units of measurements on the projects would vary it was megawatts or bushels or trucks or whatever, or bushels or trucks or whatever but the consistent themes were things like how do we get the right information to the right people in the right way when they're ready for it? How do we make sure that there's a clear shared understanding amongst parties that are trying to achieve what they hope is a common objective? But in an environment that is constantly changing, and in so many cases, the real world has a vote on what you can do and you can ignore that, but that's going to set you up for failure down the road, and so this sense of just really helping these mission-driven teams and all sorts of industries do their best work emerged as a kind of pattern for me, and so, having worked now in climate for a number of years obviously full of mission-driven teams, I see so many similar patterns again where teams want to do their best work, they have opportunities to engage, but they don't understand the logistics of their environment or the operational patterns of the real world that they have to operate in, and so that's what we are here to address.
Speaker 2:One of the analogies that I like to think about is and maybe this is for my time in the army but the evolution of polearm weapons so think like you know spears and axes and halberds and you know pikes is like lots of different innovation has happened on the end of a heavy wooden shaft and like that's great. That will change based on geography and materials and all sorts of different forces, structured climate. We aim to be the heavy wooden shaft, you know so we are. We want to be what makes all of the efforts at the front just as effective as they can be.
Speaker 1:And so why is this term bankability or financeability, uh so important? Um, I mean, apart from, of course, there's trillions that are needed in in the energy transition, in the food and agriculture transition, and they're not going to come out of crowdfunding. Nothing against crowdfunding, but like and and so, but people throw this term around quite a lot. What did, do you notice is the biggest gap between what these mission-driven founders and teams are, are thinking it means to, to get finance, or to get financed and and structurally financed, let's say I mean also coming back to your name and what actually the real world or the reality is in terms of when you go to wall street or whatever the big institutions are in your country.
Speaker 2:Yeah, so I come at this from kind of first principles, and that is that I think that we collectively, all together, have systems that are out of balance with natural boundaries and that can be described in a lot of different ways, but I fundamentally think that much of climate is reconciling with these imbalances, and from there I think that we have not an infinite amount of time to deal with those imbalances, to bring them back into balance. And so when I look at how we, again collectively, have mobilized efforts, which are capital and labor and assets and policy and so on labor and assets and policy and so on when we have been able to align those efforts with markets, we get the fastest, most enduring changes possible, and so it's my aim, then, to bring that same kind of mechanism to restoring balance within these natural systems. And so you'll probably hear a lot of analogies out of me I'm a sucker for them, but in some ways I think about structured climate as a merchant bank for climate. The first merchant banks emerged from silk traders who were seeing increasing opportunities in this incredibly new arena that the banks that they were speaking with didn't understand, and the silk traders realized that, hey, like we can make decisions about, you know, projects with other silk traders that probably banks can't necessarily understand, and so let's, let's do that.
Speaker 2:And so that concept of a merchant bank it's like a banking plus advisory services, buying industry, foreign industry is something that has emerged across industries over the centuries, and so in many ways that's one of the patterns that we are looking at at structured climate, where the reason bankability is important is that that creates the enduring, lasting drive towards the change that we hope to see, and by making it bankable we start to inculcate it into the fabric of everyday operations, into the fabric of everyday operations.
Speaker 2:And so, you know, no one looked at clean water and said is this bankable? But we all have, you know, we'd like we have water quality standards. No one looked at food quality early on and said is this bankable? But now, you know, in many places in the world you can walk into a store and take something off the shelf and then eat it without thinking twice about the food safety standards that went into it. I think the environmental impact of a given product will become part of that background scent, but it doesn't happen overnight and it doesn't happen by itself happen by itself.
Speaker 1:And why do you think is there a merchant bank needed for the climate space? Just the analogy with silk, like, is it so different than what banks like, why do traditional banks, um, maybe, apart from like certain types of renewable energy, now they're playing in, but of course it took 20, 30 years of hard work of many people. Um, like, why are they not playing in? But of course it took 20, 30 years of hard work of many people. Um, like, why are they not playing in, uh, in a lot of the things you're seeing? Why they're not financing uh that yet? And why do we need a sort of middle like a merchant bank for climate? Uh, specifically on emerging technologies with, again, clear demand, but just not huge scale yet, and like what's?
Speaker 2:holding them back I.
Speaker 2:I think there are a lot of factors at play here. I think more probably factors will emerge the farther we get from this period. I think some of the factors at play right now are the sudden change in interest rates. There was a particular interest rate environment for a long time that led to a lot of really grandiose thinking and then that suddenly snapped back and that's caused a significant change in the investability appetite, the perception of these kinds of products or services as being in demand. It waxes and wanes Banks and these conventional pools of capital. They have grown to be quite deep, but that means that they have to look for projects that are quite large to make it sort of worth their while to sharpen their pencils At the same time.
Speaker 2:Climate while it is this global scale crisis that is impacting people and communities everywhere, the actions, the solutions in the face of it are hyperlocal. It's a million people doing a million different things every day, every day, and that kind of distributed, decentralized, hyper-localized action. It doesn't necessarily fit well with centralized banking solutions, and I don't mean to wander in to crypto territory here, but rather to say look at some of the major industrial developments in the last few centuries. It took 50-some years for commercial refrigeration to really get out of the laboratory and into homes. It took 50-some-odd years for electricity to move out of again the laboratory and into something where businesses could start to use it.
Speaker 2:We see this multi-generational tech adoption curve for so many of our larger pieces of critical infrastructure. We're just seeing utility-scale solar. It's coming to the end of a 50-year time cycle and projects are just getting big enough now where it's relatively straightforward to get hundreds of millions of dollars from, you know, teacher pension funds and big institutional investors because the projects have been de-risked and that's great. Again, I don't know that we have 50 years for every bit of climate technology to make that same kind of journey of climate technology to make that same kind of journey. And so looking at the examples where clear core infrastructure has moved faster than that two to three generation timeline, you start to see elements like cell phone adoption in Africa, where you can have an extremely modularized system and decentralized infrastructure. Where you can have an extremely modularized system and decentralized infrastructure that can bring immediate value to communities that can be perceived in the moment. That day you can see your neighbor get that. That is fast.
Speaker 1:That went much faster right.
Speaker 2:That went much faster. I believe the fastest technological adoption in agriculture was auto steering tractors, in part because as soon as you had that your rows looked crisp and straight and it was neighbor to neighbor shredding like wildfire. There is such a tangibility to what we experience in our everyday lives that can drive us to act. It's unlocking that in pursuit of climate solutions, where I think there is a big opportunity and where conventional financial structures are not well suited for that. So maybe the last example I would add there is.
Speaker 2:So I live in Minneapolis and, like more and more cities these days, the city picks up our compost once, once a week, with with trash and recycling, and they didn't start doing that because, you know, someone at city hall had a spreadsheet that said this was going to work. They did it because there were enough people in the city who were doing backyard composting, who were basically turning this hobby into something that they felt increasingly passionate about, and they made it real for people who could see it and make those kinds of decisions. And now it is flipped into a municipal service and sometimes what starts as a hobby or a luxury good becomes that kind of service, and that's the path that I see for so much activity in climate.
Speaker 1:Yeah, and I mean, let's not forget, not so long ago, solar panels were only good enough in terms of cost and performance for satellites. Like that was the only place where we were putting them Not that long ago. Like that's Exactly.
Speaker 2:Well, and when Jimmyimmy carter put solar panels on the white house in the 70s, you know he didn't, he didn't have a 50-year uh spreadsheet that said this is gonna earn a return. He said, no, this is like we. Just we have to start this conversation. You know it has to start somewhere and you know, yes, they came off and reagan shook them down, but you know we, we are chronically underestimating the amount of solar uh there's these lovely slides like isn't that great yeah yeah, international energy agency and others that are.
Speaker 1:It's like you see these, these predictions of them year over year, because they produce these reports every year and then every year they're like a factor of X, like underestimating the deployment of solar and other things as well, like there's a speed to this. Of course, there's a speed to the destruction as well, but there's a very interesting, especially around technology and exponential technology, like how fast some of these things can go and how slow as well with not the right financing and not the right, and how slow as well with not the right financing and not the right. Like now we see, maybe in another climate technology, if you look at certain nuclear and certain storage facilities and certain getting an enormous kick now because of the AI boom and because of there's a massive buyer, either Google or Alphabet or Amazon, alphabet or Meta or Amazon that has made pledges about zero emissions, is building these, or Microsoft is building these massive server farms and have to incorporate somehow new technology and has a different spreadsheet than like it's not a marginal aluminum smelter that is really, really struggling. No, it's actually a super profitable company that can do this if they want. So there's a whole new energy play in the last two years happening for good and bad, but an interesting, interesting moment.
Speaker 1:And then, when you apply this lens to emerging things in like food and agriculture, or land use, or do you see things there You've been, of course, talking to a lot of purpose-driven teams, as you mentioned them, like what do you see in food and agriculture that are prime, not prime targets, but like also not easy, because none of this is easy, but are things you're engaging with? If you want to name names, of course name them, but are technologies or things you've seen like okay, that really makes sense, like in a couple of years, to have that rolled out, because it's just so logical to do it. We just have to find the steps, like step one to 10. How do we get there?
Speaker 2:Yeah, so this is where, again, the decentralized, modular, distributed technology approaches can have a really strong advantage in that they can make the change seem real and seem possible. So, like I mentioned, auto steering on tractors, but something like planting trees on farms, more trees as windbreaks or incorporating agroforestry. One of the projects at Cargill that I'm most proud of was getting 100 acres of chestnut trees planted in Kentucky with this farmer who was just looking for something different to do with some of his land, and that we were able to help him find and understand new options and then also give a clear path to engagement. It on the one hand looked sort of upfront like a somewhat small project, but this farmer quickly became a champion for these kinds of projects in his area. He was talking to his neighbors. He wanted to get more people to plant more trees so that he could just have fun with them. And when we can find those opportunities and put them into a structure that will help them grow effectively and graduate to, you know, increasingly conventional and traditional sources of financing, then that's when we're really onto something.
Speaker 2:And I think the one of the probably clearest ways to think about so much work in climate and food and and region ag right now is as a luxury good, um and and sometimes calling something up a luxury good can sound dismissive, but I I use that phrase to be clear that, uh, there can be a highly elastic demand. You know it's not mandatory that these things are required. It is entirely voluntary and the customer preferences can vary widely. But even within idiosyncratic customer preferences and highly elastic demand, there can be luxury goods makers that are quite profitable, that have robust businesses, that have robust businesses. And so where I see a lot of the climate effort focused on, and climate discussions focused on the need to have more rigid standards up front, I'm kind of deliberately coming at it from the other side and saying, if there is a buyer that wants to purchase a luxury good that is good for the climate and I can help facilitate that transaction basically be like the credit card sort of for that kind of purchase, then great, let's do that. Thoughts and opinions about which projects I hope gain more traction.
Speaker 2:But climate is a problem that needs a thousand flowers to bloom. I mean, again, this is going to be hyper-local solutions done by communities engaging on their frontline realities every day and constantly. And so, yeah, sometimes it's a luxury good and what makes sense in one community is going to seem ridiculous to another community and vice versa, and sometimes a luxury good remains a luxury good and you know it's a bottle of wine or a cigar. But sometimes a luxury good is, you know, eyeglasses that start out as like this kind of funny, weird thing that people figured out could help some people see better, and now it's healthcare, and sometimes a luxury good or backyard composting that becomes city municipal services, and so we've made these sorts of transitions before in a lot of different parts of our economy, and so it's our goal at Structured Climate is to look for and accelerate the ways that we can continue making those transitions as we reckon with this climate crisis.
Speaker 1:Yeah, and let's not forget, I think one of the company that is worth most on whatever stock exchange you look at is a luxury good company, LVMH. So there's some very solid business there. Not that you want to do that necessarily, but, as you say, we start with clear demand. If you can unlock something, who knows what becomes a commodity? And who would have guessed solar panel? I mean guess, maybe just from a physics, physics perspective it makes a lot of sense. But for at least 30, 40 years people have been saying it's too expensive, it will never reach any grid parity or any cost, etc. And now in most places it's the cheapest per kilowatt or per megawatt. What you can build with its issues, intentions, etc. Yes, their material is in it. Yes, we have to recycle them, which is perfectly possible, but it's way cleaner than anything else you can possibly imagine and it's taken off. I think, beyond what many, even enthusiasts, said.
Speaker 1:Of course food and ag is different in a sense, but a lot of technologies that are in it, a lot of the decentralized technologies, even just battery technologies for tractors, even just biochar technologies, even a lot of the agri-PV. I saw some articles I'll put it in the show notes on how the trackers on solar panels are becoming so cheap, plus the panels that Boston Consultancy Group just did a study in Germany, if you add. Of course there's a lot of discussion on agri-PV or agriculture fields going to solar panels, but if you only do it on like 10% of the farm land, it will boost your profitability so much you can pay for the whole transition of a regen ag transition. And, mind you, these 10% is not panels that take the land necessarily out of production. These are the panels that you can flip away if the tractor has to pass, or they could be biodiversity strips underneath you could graze.
Speaker 1:These are agri-PVs which of course shade certain things, which is okay for certain plants, not okay for others, but you can integrate them. They're not the nicest things to look at, a tree is nicer but they do produce a lot of cash. At the moment, and especially with trackers, you can hit the sun in the shoulder hours of the the day, which means you actually can get really interesting contracts. And of course big question becomes what do you do with the extra, with the excess power, because during the peak of the day probably you're you're not going to sell to the grid. So what do you do with that? Do you charge a tractor, do you free something, do you process, do you do you, etc. I don't know um exactly on a server farm.
Speaker 1:Um, like what do you say that? Completely like this, this commoditization and technology, exponential technology push in one field is now like field is now hitting, is starting to hit agriculture as well. And like the big question is okay, how do we make sure it only stays at 10, because you don't want 100 of the farm, probably, but how do you use that to fuel other transitions? And what are you going to do with the access? How are you going to store that?
Speaker 1:And that would have been inconceivable, I think even a couple of years ago, because the trackers weren't, I think, cheap enough, more reliable enough, plus the panels were definitely not cheap enough, and so you just couldn't have them. You needed to have them like big structures, really high up, so you could drive underneath. I don't remember, I don't know if you remember those pictures, but now you just flip them away and you could live next to them, and so there will be a lot of those. But then, going to the example, like, okay, if you take an example, I don't know what you want to mention or discuss, but how would you do that? You say, okay, we start with as luxury, good, not ideal, but better than nothing. And how do you then, step by step, increase the chance of it becoming, it taking off?
Speaker 2:Maybe it stays a luxury good, maybe not. And like what are the steps to make it actually again quote unquote bankable? Yeah, so our first engagement with our clients really starts with understanding their customer. You know what are they doing for their customer, why does their customer want to buy. You know the service or the product from them. What kind of customer is that? How informed are they? Have they bought this kind of thing before? Have they experienced it, et cetera. So I think one example that really highlights this is a company that is working in the western US and they have designed a system that concentrates solar energy onto wastewater treatment, and not by using solar PV panels, but rather by using what are essentially giant magnifying glasses. You know, it's like we've even maybe you've played with a magnifying glass in bright sunlight. Yeah, exactly. So this company you know these things like two or three meter wide lenses that concentrate sunlight onto a stream of wastewater and it can produce heat and pressure that is strong enough to break down the bonds of any waste products in that water.
Speaker 1:I remember in London there was like a building that was designed right. That became a sort of mirror and then a car started to either burn or melt like something like they designed a building with a sort of concave shape Okay.
Speaker 2:I would not be.
Speaker 1:I would not be surprised from a James Bond movie, but it for sure was as well. But this concentrates on wastewater, which is way better.
Speaker 2:Many, many years ago I was uh, I was selling um, what are the? The windows that have the reflective titanium uh bits in them, that basically low, low e, I think. Um anyway, uh, if you put low e windows uh too close to uh or in a house that was too close to another house with vinyl siding, you could sometimes heat up vinyl siding to the point that it uh did not have optimal performance, um, anyway. So this, this company of focal technologies, they are just really good at making these giant lenses, uh, and this kind of on-site distributed wastewater treatment is is one of the clear options here, and one of the clear benefits and the the beauty of this solution is that the customers, the, the sewage engineers at mobile home communities and breweries and a winery or a dairy or any number of places that deal with wastewater they know exactly what kind of waste they produce. They know exactly what kind of waste they produce, they know exactly what kind of water standards they have to meet, and often they are in a tight spot in which their options are very limited to essentially storing the wastewater that they produce until they can truck it away, or undergoing an incredible expense to get to the point where existing sewage infrastructure extends out to where they are, and both of those are long established practices and certainly doable Increasingly out west land application of this wastewater is is, uh, not being allowed because of what's understood to be some of the long-term effects on aquifers, and so focal technologies is, uh, an instance of a new kind of service that provides on-site decentralized wastewater treatment in a way that it does not involve trucking the water out, it doesn't create, you know, involve a bunch of chemicals.
Speaker 2:It mitigates the risk of storing these wastewater products on site, and when you can see it and understand it, you're like, oh, I get it, like I can see that the sunlight is being concentrated and just like cooking this, cooking this wastewater clean. And yet it's a small, new company, and so one of the areas that we are helping them with is getting a dedicated leasing structure set up that can allow them to serve their clients on a service-based solution.
Speaker 1:So the clients don't have to go out in super thin margins to say, okay, let's pay for this. Yes, new company with a weird big mirror or magnifying glass is going to do magic, like yeah, let somebody else do that please first.
Speaker 2:And a lot of their clients that need these kinds of solutions are not big enough to need them all year round, and if they were, they would have a different kind of capital available.
Speaker 2:And so this is an example of there being a clear climate technology that has hyperlocal benefits that can be immediately understood once they are seen, but it's new and so banks consider it expensive and it's hard to finance.
Speaker 2:And so that's a great example where what can seem like a quote, unquote luxury, good, a kind of maybe strange at first way to engage, that can make just a lot of sense and with the right kind of financial structure for that company to offer those services, they then have a path to growth. And I don't want to imply that getting the right kind of financing, you know, sort of solves every other problem, but rather you know focal technologies like they are amazing at making lenses. So let's like I want to keep them focused on making lenses and optimizing those systems. And this is where, like you know, let structure climate be the heavy wooden shaft at the end of the weapon and the tip of the spear the, the head of it, can can be adapted to whatever the local environment needs or whatever that that particular challenge is yeah, and in this case, like they will get better as they do it, more, as they serve more clients, they have a second generation technology out and it will be a third generation.
Speaker 1:But if they really only can only serve clients that can pay them basically on the spot, um, for the whole thing, um, it just becomes you're stuck in this inventor. Um, this is my first version. If we only had money, we'll do the next one. And but what we've seen, all these exponential technologies and I'm not saying this is one, but you see, like the adoption, like as soon as it's being used or being produced way more, the prices start dropping. Like, of course they're learning curves, et cetera, et cetera, but that requires something to be used, quite a lot to start seeing. Okay, if we put this machine together differently, if we make these lenses differently, if we do another flow through this, et cetera, et cetera, et cetera, you're only going to see that if you uh, yeah, if you use it often. And so how do you then set up a lease facility like that? Like what makes you, what makes it possible for you to do that, compared to them going to a bank and said give us a loan so we can lease this out to X Y, z.
Speaker 2:Yeah, so one of the biggest tools that we use, especially for early companies uh, like Focal is the is the syndication or the pooling of charitable capital into low-cost, dedicated project financing structures. And when I say charitable capital, I mean when I say charitable capital it's exactly what you might think it is. It's donations and foundations and nonprofits and green banks and so on. And I think it is important to really understand the scale here. And this was one of the big unlocks for me a few months ago when I started on this journey. That was for all of the hype around voluntary carbon markets and all of the rapid growth and expansion of pathways and technologies and carbon removal and so on. Those transactions total generously, let's say, $2 billion a year. That's great. I want that to continue growing. All of those projects, or almost all of those projects, claim co-benefits like biodiversity support and water quality improvements and social and economic and world development and so on. And, as they should right, that's part of their luxury. Good offering is, they say here is the full story of what we do and here's why you should support this project. And so, looking just at the co-benefits of those kinds of projects biodiversity, water, social, economic development, et cetera. And then looking at the charitable giving that goes towards those projects every year it's about a hundred billion dollars in pure donations goes to those kinds of projects every year and just the fact that there's so much focus on this sliver of carbon, when all of these projects have a much broader surface area to them that can attract a much larger pool of capital, made it clear to me that we need to figure out how best to put this kind of capital to work solving these kinds of problems, and so that has been done.
Speaker 2:On and off there, there have been examples of this kind of charitable capital being put into for-profit projects, and what we really found was that the biggest foundations the Ford Foundation, the Gates Foundation, etc.
Speaker 2:They do this at a massive scale every year, which is great. It makes a ton of sense. They have massive endowments and can make really smart decisions about how they both allocate and distribute, grow their capital to achieve the impacts that they want to achieve. And I think there's an opportunity for those same kinds of tools to be brought to a much smaller, more hyper-local level, where, again, the climate, entrepreneurs need it. And so that's again that's been one of our major tools at that small level is the use of charitable capital into these low-cost loans, and so what that looks like is we are centralizing and managing the compliance mechanisms for the charitable capital to be used in that way, and so to a climate company like Focal, it looks like they're getting a loan from a bank, and to a donor, it looks like they are making a donation to a non-profit, and so we make that translation in the middle.
Speaker 1:With the hope, of course, that they graduate at some point. To like this is not an ongoing like oh, we have to um support this lease facility for forever because that's precisely right.
Speaker 2:Yeah, so to to describe another project, um, the. We're working with a company based here in Minneapolis that has a biochar system that they are putting into a local landfill run by waste management and they need a few million dollars in project financing and they were looking at raising an equity round to do that. But that's a really expensive cost of capital relative to what their project can can produce, and so we are again pooling charitable capital into a project financing loan for for this project. The anchor donor in that case is the, the family foundation of Eric Schmidt of former CEO of Google, and that foundation has in their, their charter statement, you know, support for circular economy projects and oceans and other elements like that, and from their perspective, they are essentially making grants in support of of those kinds of outcomes. From the biochar companies perspective, they are essentially making grants in support of those kinds of outcomes. From the biochar company's perspective, they are receiving a low-cost loan and because the charitable money is being loaned out to a for-profit project with the expectation that it will be paid back, then, as that loan is repaid, it then goes out and gets recycled into other biochar projects and other circular economy projects, and so it is a way to take these what are essentially donations, but put them to work multiple times in support of certain outcomes.
Speaker 2:Support of certain outcomes and I don't mean to say that every kind of donation should be able to generate a return. That is definitely not true. There are lots of parts of the charitable landscape where that support is critical. What I think is important to highlight, though, is that if someone wants to support clean water, clean air, biodiversity, strong, healthy natural systems again to go back to first principles I believe that our mechanisms for allocating capital across marketplaces need to be in support of those outcomes too, and so this use of charitable capital as a way to get these projects started then puts them on a path to the point where they can graduate to more conventional project financing that much sooner. So if we get more smaller projects funded faster, I think we'll get the actual, more impactful projects that are conventionally investable that much sooner.
Speaker 1:Yeah, because I mean it is a sort of portfolio approach. We don't know which of these companies can scale, who have the capabilities, the technologies et cetera, but we will only find out by doing it, and doing it at a small enough scale that you can start seeing it at a large enough scale that you can start financing it, Financing it at well. And if you look at I mean you mentioned Biochar, which of course has a land angle Like have you seen things in food and ag? Or I mean, of course, coming from your cargo days, have you seen things already? Would you like to see things? Where do you see in in, let's say, land use? Do you see interesting areas where this approach, differently, should be used or could be used?
Speaker 2:Yeah. So the I think one of the of the most promising areas for land use changes is an ability to think and operate at a smaller and smaller level. Be tempting to say I have this field over here is 77 acres and I'm just going to put the whole thing into a conservation easement. Or I'm not going to put the whole thing into a conservation easement because that's going to upset my finances and that's too hard for me. But what if you had a more granular view there? What if you just looked at the back view there? You know what if you just looked at the, the back three acres that slope down towards the stream, or you know the, the tricky bit that's behind that, that stand of trees that's still there? And what if you just, you know, slice off a bit of that 77 acres and made it you?
Speaker 2:know, easier to manage with your, your tractor or you know the. The parts that weren't parts that weren't performing optimally, you put into a conservation easement and started to get not only that revenue but also the added benefits of better pollinator habitats and better biodiversity and better soil moisture retention. It doesn't have to be an all or nothing change, but that is often how we approach these kinds of problems. We think it has to be all of one thing or all of another, and that's hard when many of our systems only allow for a binary light switch.
Speaker 2:Yep, exactly, that can be hard, can be hard, and so, to the extent that we can see land as this multifaceted, multipurpose asset, every square meter of land is going to have something that it's good for and things that it's not good for, and that's fine if we have the tools and the capabilities and, more importantly, the language and the social and commercial and cultural constructs to think about land as this incredibly diverse and capable asset, where it's not just making the same decision everywhere, it's saying what is the best decision for here?
Speaker 1:And you mentioned trees before in agroforestry. Of course Cargill is involved in agroforestry partners and with Propagate. Is that something you like? And they have a clear mission to make trees bankable or investable. Is that something you're the agroforestry side, of course, super context specific you're interested in? Is that still too far or too early? Or what do you see in terms of perennials, let's say, in agriculture?
Speaker 2:Yeah, I think there are a lot of ways that perennial crops can present this kind of hyper local opportunity for new business models where low cost financing can create the bridge to a new, more stable economic state in a community. And so, you know, when I was at Cargill, I worked with the folks at MAD Ag and now you know MAD Capital, and I love their model because they are getting hands-on with the communities that they engage in and working within the realities of of their stakeholders. And so, you know, if there is a like, it's one thing to say, here's a farmer that wants to plant a perennial crop, but you know that, like that's the tip of the spear. The heavy wooden shaft around the farmer is like well, you know, where are they buying the seeds? How do they know when to plant it, where's the where's?
Speaker 1:the even planned. What do you maintain? How do you?
Speaker 2:harvest. Once it's harvested, where does it go for processing? Who's who's buying it? Right Like there, we? We have so many systems that are massive in their striving for efficiency that again, historically, you can understand how they came to be that way, and it drives outcomes at the field level that totally align with those systems. What we are starting to see now is an emerging and increasingly clear need for smaller, more flexible, more resilient systems, and that's a hard change, and so that's the kind of mechanism where we are focused on a clear customer demand signal.
Speaker 2:It might be small, and it often is. We often find projects and our clients. They think, oh, I'm not big enough for this yet, but it's not that there needs to be a massive market opportunity, that there needs to be a clear market opportunity of charitable capital into supporting these kinds of projects. And then we do it in a way that makes the projects recognizable to bankers and project finance groups as the projects grow, and so that's stuff like establishing special purpose vehicles to house the project activities and receive the financing, often at non-recourse terms, so we're not threatening to equity holders at the parent company, and this is often kind of a new area of discussion for startups. But this is how real assets have been financed in commercial real estate, in energy projects, in all sorts of large industries for decades. There is a long established set of commercial hygiene standards that we aim to bring to as early a stage as possible which is certainly doable, it's just not conventional, and so by doing that, we make the projects recognizable to conventional financing much earlier.
Speaker 2:but because we're bringing in this tax-advantaged, thematic or charitable capital, we can come in at a much smaller and earlier stage. And so, then, it's our belief, as Structured Climate, that by being able to access this tool to engage with companies earlier and at a smaller stage, but in a way that sets them up to grow, that we then earn the opportunity to be that partner as they grow.
Speaker 1:Yeah, because that's your long-term business model is to stay with them and grow with them as they as a few of them, of course grow, as, like part of your portfolio, will keep rolling out and keep going down the cost curves, et cetera.
Speaker 2:Correct and that's again. That's a pattern that you see in merchant banks as they have emerged in industries across history, and some of those industries start as luxury goods industries and some of those industries are commodity industries. The fact is that you have a blend of advisory and financial and commercial transaction services that are necessary and that specialty groups can do with a clearer eye towards risks and managing risks, but also in a way that can cross-pollinate lessons learned and really start to create some of the connections that again don't emerge naturally or would take much longer to emerge if it were a bunch of individual actors pursuing their own projects if it were a bunch of individual actors pursuing their own projects.
Speaker 1:And so what would be your main message to investors listening that maybe already are interested in food and ag or are not, could be working at institutional or not, but having this conversation on bankability on their mind, or what would be a seed you would like to plant with them so it might speed up, or something they should do or should act on?
Speaker 2:Yeah, so you know, just like making decisions about fields are not like binary light switches I don't know that I would say investors can be, you know, talked to as like a binary light switch. So I would say that there are a few different messages that might resonate with different groups. I would say that there are a few different messages that might resonate with different groups, and so one message might be let's make sure that we are getting the right kind of capital at the right cost for whatever your investment or your project is looking to do for this next stage. And one of the big challenges in so many areas of climate tech and has happened in so many areas of regenerative ag and renewable energy is that these new industries are offering debt-like returns, but they force investors to accept equity-like risk, and that's a mismatch in which the investors have a hard time saying, yes, I will take this much risk for this little return. So understanding the right kind of cost of capital for a given activity is certainly one important message, but then the other kind of way that I would balance that out is to say that if you are an investor with a variety of regen ag companies that you are supporting in different ways or things like that, and you think about tax efficiency on a beardier basis. You look at opportunities for tax loss harvesting, or you look at ways to maximize deductions. Maybe you have a massive gain in one year and you want to carry forward those deductions to reduce your taxable income over multiple years.
Speaker 2:There are all sorts of reasons, and in the US certainly, a lot of energy is expended in tax efficiency strategies, and that's totally understandable.
Speaker 2:The capital that is going into charitable deductions for tax efficiency strategies can be put to work in these industries.
Speaker 2:And so that's again where, if you are supporting agriculture or supporting water or food systems or so on, if you think of a donation as a negative 100% return in some cases, what I'm saying with structured climate is there's a way to turn that negative 100% return into a 5% return.
Speaker 2:We can keep this capital cycling through these industries and these projects in a way that will also reinforce, maybe, other investments that an investor has. And so it's a bit of a like bringing up a broader set of capital tools to areas that an investor either is passionate about or feels uniquely well-informed about or well-connected in, or so on. And then maybe last would be that you know, while there is, there are certainly lots of unique technical challenges to solve in the particulars of a given project or industry. There are also often opportunities to look at how other industries have solved similar problems and learn something there, featuring commercial entities for ring-fenced risk management and project financing, or handling trucking contracts. Whether you're moving crushed up rocks or grain or different products, there are enough areas that industries are unique, but there are maybe more areas that they share in common, and so looking for those opportunities can also create some interesting insights.
Speaker 1:And what would you do if you flipped that? I mean for sure you thought about this. If you had a capital pool of, let's say, a billion dollars and I'm not looking for exact amounts, of course it's not investment advice but how would you put that to work? Or how would you go about it? If you had quite a significant pool of capital to put to work, what would you, and how many small pieces would you cut it? I think is a question.
Speaker 2:Yeah. So if I had a significant pool of capital and and anyone that wants to back this feel free to get in touch I would take probably a two-pronged approach to start a climate franchise model in which there can be empowered community members that can access resources that extend well beyond their community but are in touch and localized enough to work within their community, and then to that climate franchise model I would offer. And then to that climate franchise model I would offer essentially a modular project financing offer where there is, as almost like a Lego building block of you know you need this much capital on these terms for these years. Here it is. It's completely public, the terms are totally standard. If you want to take this, here's how you take it.
Speaker 2:And that, paired with the franchise model that can engage community members at the front lines at these local levels, I think will just rapidly accelerate the learning curves that we're all on, and it's the growth of the learning curves that I think present the long-term opportunities. And so modular financing combined with a climate franchise model is where I think there would be a lot of potential there. And the last thing on the climate franchise model is that, looking at even something like electricity, which is a long-established industry. Just because you buy an appliance in one country doesn't mean you can go to another country and plug it into the wall. We have these variations across base infrastructure layers and definitions of things like volts and amps Even well, like electrons are really well understood and like refrigeration is really well understood and you know cell phones and like right, like the outcomes from the flow of electrons, like those can be really well understood and we don't necessarily need standardization to get those outcomes started.
Speaker 1:We can start with localized effects and localized impacts, but done in a way that can share lessons and share what's been learned such that it can be mutually reinforcing across a really broad scale and then, as a final, final question, we'd like to ask if you, if you had a magic wand and you could change one thing overnight, could be anything, um, could also mean big banks or big financial institutions. Looking at this space differently, it could be, uh, conscious, global consciousness. We've we've heard a multitude of answers, a whole spectrum, let's say. But if you had that power, so you had a want and you could change one thing overnight, what would that be?
Speaker 2:yeah, I um, so I have, uh, four kids, uh, that are six years apart in age, and so I have, you know, as probably a lot of new parents or parents that you might have, as as, as lawyers know like there are those times where you're just strung out and you can walk into a store and you can buy something on the shelf and sort of shuffle to the checkout and and buy it and and eat it, and you don't have a second thought about the food safety mechanisms that went into that. Right, this is, you sort of wave your hand at this massive, invisible industry that you assume is there and it is. It is a breaking news when there is some problem with that and then that is 9.999.
Speaker 1:Well, I mean not saying it's long-term safe for you to eat it, but definitely short term. You're not going to die, yeah. Yes, right, and I would be very odd if you spend the night on the toilet or something much more in restaurants actually, which is very different.
Speaker 2:Like the packaged food, industry has been pretty good at keeping right so, so, so, and and there are lots of things you can also say about packaged food, and I don't, I don't mean to invite uh yeah, but still, it's magical, don't start writing emails.
Speaker 1:People please like to to like.
Speaker 2:That was not the case 100 years ago or 200, or correct yeah and, and so my, my magic wand would be to make that same kind of background assumption about environmental balance. Or it's like you you pick something off the shelf and you're like, yeah, of course, this was like made in an environmentally balanced way, like duh, this is, whatever, it's 2024 out. How could something be made that wasn't environmentally balanced? How could something be made that's not safe to eat? And it's such a background assumption that drives so much investability in food and ag assumption about environmental impacts, because that then creates a clear demand pull through for the outcomes that we hope to achieve.
Speaker 1:Thank you. Thank you for that answer. I think the background there and food safety we just don't think about, and water safety in places, if you're lucky enough, obviously and right just the fact you switch a plug and 99.9 percent of the time the, the light and airco etc just works and that kind of it's. It's like even our parents and grandparents wouldn't find that normal.
Speaker 2:Um, and and how easy we get used to, or g GPS.
Speaker 1:We all lost our sense of location and direction quite badly, because we just think it's there and we're really lost if it's not.
Speaker 2:Totally. There are some great pictures from New York City at the turn of the 20th century where the streets are just festooned with wires, I mean, it's crowded, they blot out the sky because there's this new rise of electricity and rise of telephones and rise of all these cables are being strung everywhere and it's incredibly messy. And if you look at pictures from even 10 or 20 years later, the streets are much clearer and the use of all those technologies is much greater. That's where it has started to fade into the background. We had to go through that messy middle to get to the point where it starts to become invisible.
Speaker 2:If I could say one thing to so many people working in climate, it's like don't run away from the messy middle, like the only way through it is through it and it's going to be there waiting for us to resolve whether we address it now or address it later. And you know, just like the best time to plant a tree is 20 years ago and the next best time is today, it's like the best time to get into the messy middle is. I don't know how that analogy sticks together. Anyway, we can.
Speaker 1:Maybe it's now definitely Like you hope somebody would have figured out heat pumps 20 years ago and like solar and but this financing trees for, for energy on farms, for electric tractors, I mean there's an endless list of tools and technologies.
Speaker 2:And even I would consider technologies.
Speaker 1:We've done a whole series on like. If you look at the Greek word, I think it's very like financing mechanisms. Are technologies Like what you're building?
Speaker 2:is a technology. And if it's going to be exponential or not that's going to be, we're going to see.
Speaker 1:But it's like financing mechanism, crowdfunding, like all of that was very messy crowd lending, which is a multi-billion dollar industry, and I mean now I can put a thousand euros into a solar project in the netherlands and get a good return, which would it would have been unthinkable 10 years ago or 20 years ago, like wouldn't even be like would never be accessible for me or actually anybody else in that sense like it, and so, but yeah, don't run away from the messy middle, I think is a good way to to end, uh, to wrap this, this conversation up, thank you so much for um bringing a absolutely crucial and very much overlooked, at least in our podcast, but I think in general, uh topic to uh to climate and to regen, food and ag, which is how do we make this bankable and how do we actually do that, which is going through the middle with a very clear vision of this, needs to be understandable.
Speaker 1:This needs to have SPVs and all the lingo and all the structures in place that we've been using to finance real assets. And if you don't want that, it's fine. But then don't say we're going to make this bankable, because it won't work unless we change all the banks and all the financial institutions, which I think is a small chance.
Speaker 2:We can do that overnight.
Speaker 1:Now I'm not going to go into the blockchain discussion but anyway thank you so much for for coming on here, matt, and share your journey, in the work you're doing and and hopefully there will be many um, starting off luxury goods companies in land use, let's say, and uh, some of them will become a very, very interesting regenerative commodity, if that's even a word over time.
Speaker 2:I don't see any reason why regenerative commodity could not be a word, could not be a phrase. It's maybe not what we talk about today, but the idea of there being an interchangeable element and the idea of products that not only don't degrade but actively restore the environments in which they are produced, that is, I think, a great aspiration.
Speaker 1:Thank you so much for listening all the way to the end. For the show notes and links we discussed in this episode, check out our website. Thank you so much for listening all the way to the end. For the show notes and links we discussed in this episode, check out our website. Investinginregenerativeagriculturecom. Forward slash posts. If you liked this episode, why not share it with a friend or give us a rating on Apple Podcasts? That really helps. Thanks again, and see you next time.
